Hopes Dashed (For Now) - Part 3

October 15, 2015

Background

In Part 1 of this eUpdate series, we discussed the reasons why Hong Kong regulators did not approve of share structures with disproportionate voting rights, also known as the “weighted voting rights” (“WVR”) structures in Hong Kong, whether this could be an impediment to the listing of new wave large technological companies in Hong Kong and whether Hong Kong needs to amend its restrictive rules. We also noted that Hong Kong regulators staunchly adhere to the principle of equality of treatment for all shareholders.

In Part 2 of this eUpdate series, we discussed the paper published by the Stock Exchange of Hong Kong Limited (“SEHK”) regarding the permissibility of WVR structures in Hong Kong and the SEHK’s draft proposal permitting WVR structures for certain companies in particular circumstances for second stage consultation. We also discussed the announcement made by the Securities and Futures Commission (“SFC”) that it did not support such a proposal (“SFC Statement”) and the SEHK’s response that the SFC’s view would be material to the final proposal that the SEHK puts forward for formal second stage consultation. We left off noting the SEHK’s intention to further engage with the SFC to determine the best way forward on this issue.

New Developments

On October 5, 2015, the SEHK announced that, after considering the views of the SFC, it would not be proceeding with the draft proposal.1 This decision ends more than two years of controversy over the major listing reform.2 David Graham, the Chief Regulatory Officer and Head of Listing of the Hong Kong Exchanges and Clearing Limited3 stated that: “[t]he Listing Committee [of the SEHK] has decided, in light of the SFC Statement, that it will not, at this time, proceed with finalising its draft proposal for discussions with stakeholders nor seek to put forward a proposal for a formal consultation as originally proposed.”4

According to the Listing Committee, in light of the SFC Statement, the SEHK considered whether the draft proposal could be modified in a way that would meet the SFC’s concerns while providing a regime that would likely succeed in developing the Hong Kong market. Although the Listing Committee sees this is an important topic for Hong Kong and one that deserved the full attention of the Hong Kong market, it does not believe that progress can be made on a workable proposal for the primary listing of companies with WVR structures in Hong Kong.5

In response to the SEHK’s announcement, SFC chairman Carlson Tong Ka-shing said that he “respected [SEHK’s] decision not to proceed with the second phase consultation.” He went on to explain that “many technology firms had delisted from the U.S. earlier this year and planned to return to the mainland to list in the A-share market, which suggested valuations might be more of a deciding factor in the choice of listing venue than WVR structures.” According to Mr. Tong, the “SFC priority is to make sure that [its] rules protect the interest of all investors and to maintain a fair market”. He made reference to the SFC Statement, stating “we were not yet convinced that the proposals on the dual-share structure reforms by the stock exchange managed to solve the problem of how to ensure that WVR will not be a common occurrence and the interests of investors will be fairly and fully protected.”6 Such statements underscore the emphasis that Hong Kong regulators place on shareholder equality and the principle of “one-share, one-vote”.

Unsurprisingly, there has been a mixed reaction to the SEHK’s decision. Those that are pro-business see the decision as keeping out companies that want to list in Hong Kong via a more flexible structure, finding that the SEHK is not flexible enough to compete with other markets.7 On the other hand, shareholder activists welcomed the decision, as to some, “corporate governance was already bad enough without making it even easier to abuse minority shareholders.”8

Wiggle Room?

The door may not be closed on a WVR structure in Hong Kong, as the Listing Committee noted that it “will keep this matter under review”9 and will keep an eye on future regulatory developments overseas.10